1. Identify and briefly describe what factors most determine the success or failure of the Midwestern Steel Division. Include reference to the importance of cost control in your answer.
2. Identify and briefly describe the strengths and weaknesses of the old performance measurement system. Do you think the old system is good or bad, give reasons for your answer?
3. Explain why the operating managers seemed to like the old performance measurement system.
4. Evaluate the new performance measurement system and the way in which it was being implemented.
Hint: To support your evaluation think about the following:
a) What were the important features of the new system?
b) What improvements did the new system offer and what were the weaknesses of the new system?
5. Based on your evaluation in question 4 and the â€œremaining issuesâ€ recommend changes to the new performance measurement system.
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Midwestern steel division deals in the production of stainless, electrical and carbon steels products in the United States and it is the largest subdivision in the Kansas City works, which produces two products: grinding media and carbon wire rod. In the year 1991, the implementation of new system takes place in the company in terms of performance management by making changes in the cost control. the factors that will determine the success or failure of the Midwestern steel division is that success of the company depends on the durability of the products in comparison with their competitors. Whereas the carbon wire rods are not profitable as it covered only some part of the fixed cost through its production volume.
The old performance system used by Armco Inc. does not work properly as it has several problems involved with it. firstly the old performance system did not provide information on the part of the product mix that is being produced, as it provides data on the total tonnage produced, but did not provide the information in terms of production breakdown. Secondly, the performance measurement system in comparison with actual data does not provide data that exactly what factors cause variance. Thirdly the costs were not broken down into a variable cost, fixed cost. In addition to that, the old performance system did not measure the Key performance Index of each department alike to the new system (Bedford,2016). In my opinion, the greatest weakness of the old system is that the accounting data is not appropriate which is difficult in terms of analysis and not serving the problem of the organization but rather caused inefficiencies.
The operating mangers liked the old performance system because it is clear and understandable on their part and nobody wants to move out from their familiar comfort zone and the mangers are using the same operating statistics report, which provides the same accounting information to the mangers in terms of cost involved, which is termed as the cost above system, and when this cost above system was eliminated the mangers will become unhappy. Secondly, in old performance system, the performances are evaluated on the basis of safety, productivity, and quality which will be changed in the new system.
After going through the case of Armco Inc. it is found out that the main objective of the organization is to maximize the profits and sustain its position in the US market. For retaining profitability the management is introducing the new control system in terms of new performance system by replacing the old system that was based on an operating report (King, 2015). The new performance system is based on the tight control system which is based on the performance measures which is designed for the greater understanding of the low and middle level managers so that it helps in producing advanced business strategies which will ultimately improve the performance of the managers. this system is also seen as the cost control method by evaluating the cash flow and inventory flow on monthly basis, which helps in cutting down of cost in an efficient manner, by eliminating the above the cost measure.
The recommendations that will be proposed for the new performance system is that the organization should adopt the control problem avoidance strategy by redesigning the plant infrastructure in the way so that the remaining space will be used for leasing or selling. Secondly, the company has to adopt the tight control management system as the objective of the company is to achieve high profitability and this system will help in attaining the objective (Otley,2016). This tight control system will help the organization in cutting down costs as the control on human resources will cut down the huge labor cost that is currently being incurred by the organization. In my opinion, the company must have to adopt the tight control management system as this system in alignment with new performance system will motivate the managers to achieve the objectives of the organization.
Merchant, K., & Henry, P. Armco,Inc.: Midwestern Steel Division (pp. 41-54).
Bedford, D. S., Malmi, T., & Sandelin, M. (2016). Management control effectiveness and strategy: An empirical analysis of packages and systems. Accounting, Organizations and Society, 51, 12-28.
Otley, D. (2016). The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, 45-62.
King, R., & Clarkson, P. (2015). Management control system design, ownership, and performance in professional service organisations. Accounting, Organizations and Society, 45, 24-39.